You’d be surprised at what’s typically buried in a 10-K public financial statement. With this publicly-available document, anyone can judge a company’s earning power, the value of its assets, its earning trends and how it compares to the rest of its competitors. That’s a lot of strategic insight available at your fingertips. It means you can determine the long-term viability of a company, its level of distress (if any), its threat to your business, and if it’s a good candidate for partnership or as a sales prospect. But where do you begin to look?
Luckily, there are some fundamental metrics buried in 10-Ks that provide a clear view of these insights. Here are just a few:
STATEMENT OF CASH FLOWS
The statement of cash flows is among the most important KPIs within a 10-K. Because many businesses use accrual-based accounting, revenues may not get reported until well after the fact. The statement of cash flows reports cash generated during a specific period. This cash from operating activities can be compared to the company's net income. If the cash from operating activities is consistently greater than the net income, the company's net income or earnings are said to be of a "high quality". If the cash from operating activities is less than net income, a red flag is raised as to why the reported net income is not turning into cash.
Business in the midst of major acquisitions may be investing in growth (and could be a sales prospect) or changing their operational or growth strategy. If they’re spending their money here, vendors should pay attention.
COMMITMENTS AND CONTINGENCIES
These, found in the footnotes of 10-Ks can often show commitments in the form of lawsuits or outstanding debts that have yet to be repaid. A large amount of commitments can show a company in distress.
Along the same lines, companies with large debts can indicate distress, but paradoxically, it can also indicate growth. Many companies use bonds or loans to build infrastructure. Also, companies can exchange debt for equity to retain management control.
Liquidation value is the total worth of a company's physical assets when it goes out of business or if it were to go out of business. It can provide you with an idea of the company’s real estate holdings, inventory and equipment holdings.
MARGIN OF PROFIT
A company’s profit margin is an indicator of efficiency. Lower margins can indicate inefficient processes or overinvestment in assets (also check the Net Asset Current Value to see what they’re holding in assets) and could tell you if a company may need restructuring or help.
FREE CASH FLOW
This metric shows you a company’s ability to pay debts and facilitate business growth. If this number is lower than the competition, they can be overextended, so make sure to view their current debts as well. High free cash flow can tell you that they’ve got money to invest in new product development or R&D.
The bottom line is this: 10-Ks are a wealth of insider information on the companies you care about. They’re also a great way to perform due diligence without investing in market research or competitive analysis. In fact, many employees don’t know the level of information available in these documents. Before you engage with any new public company, you should always find a quick, easy way to examine their public data first.